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Global and regional review: Ch-ch-ch-changes…

05th July, 2019

Back in January our outlook for this year was a positive one based on continued global economic growth, albeit at slower rate than in previous years, which in turn would allow for sustained corporate profit growth. These factors combined with attractive market valuations, given the selloff in the fourth quarter, and benign interest rate expectations in the major economies fostered the potential for positive investor returns over the mid-term. But few would have predicted the scale and the speed of the returns that we have witnessed so far in 2019.

The rally in markets is all the more interesting given the fact that it has occurred against a backdrop of fundamentals deteriorating at the margin. While two swallows may not make a summer, four economic forecasts certainly do make a trend. In the case of the growth outlook for the European region, this trend has not been a favourable one.

Back in March, the European Commission (EC) was the 'canary in this coal mine' when it released its revised growth projections for Europe but was soon followed by the Organisation for Economic Co-operation and Development (OECD) as it published its new interim economic outlook. Shortly thereafter the European Central Bank (ECB) held its regular monthly meeting and announced a surprisingly large cut to economic growth and inflation projections.

Not to be outdone, the International Monetary Fund (IMF) joined the debate in May with its change to forecasts. Global growth is now predicted to slow from 3.6% in 2018 to 3.3% in 2019 (a downgrade from its January forecast of 3.7%) – which marks the weakest level since 2009. On a regional basis, few countries were spared - the notable exception being China – with the Euro area most severely hit, led by Germany and Italy.

Central banks to the fore

With its downgrade to growth projections, the ECB had two other noteworthy developments for investors. On the topic of interest rates, the bank's new forward guidance states that key ECB interest rates are expected to remain at their present levels “at least through first half of 2020”. Previously, it had indicated that rates would stay at current levels “at least through the end of 2019”. ECB president Mario Draghi even said that an extension to March 2020 was debated. This coupled with his planned retirement later this year, means that Draghi will be the first president to complete his term without raising interest rates. Some feat indeed!

The US Federal Reserve (Fed) also gave investors something to think about with what seemed like mixed messages. In March the central bank provided a dovish surprise relative to market expectations by lowering its guidance to reflect zero interest rate hikes in 2019.

Then in April the Fed Chair Jerome Powell gave markets a bit of a wake-up call by intimating that we may not have reached the peak of interest rates for this cycle. The Fed continues to see strength in the underlying economy and maintains an unshaken confidence that inflation will move back towards target. A deterioration in the economic data of late has increased the belief in markets that rate cuts in the US are likely sooner than the authorities are willing to admit.

The dreaded 'B' word!

Those that expected a nice neat conclusion to Brexit by the March 29th deadline were either extreme optimists or completely deluded. Following much to-ing and fro-ing, three unsuccessful votes in the House of Commons, and negotiations between the main political parties in the UK, it took an emergency summit between the European Union (EU) and UK to agree to extend the Article 50 negotiating period to October 31st. But the change of Conservative Party leader – and consequentially at Number 10 – has added further complexity to this interim period. With the EU showing no appetite for changes to the Withdrawal Agreement and a no deal exit already ruled out by the House of Commons, the way forward looks less than clear at this stage.

Trade winds

With progress seemingly being made behind the scenes, the sudden escalation of US tariffs against China came as a bit of a shock. Markets have no greater insight as to whether these trade developments are just hardball from President Trump or the start of a very real threat to the global growth narrative. But the prospects of a 'List 4' of goods being drawn up has upped the ante considerably.

If it’s the latter, then you can’t help but feel that markets may struggle to hold onto the gains they have made so far this year as volatility increases, and could have ramifications for medium term returns for investors. However, if it’s just hardball negotiation en route to a deal, then we’ll likely see further gains from equity markets as global economic growth remains positive and market valuations, while not cheap, are not at stretched levels relative to history.

Global and Regional half year review
What have been the key issues for markets in 2019?

Back in January our outlook for this year was a positive one based on continued global economic growth, albeit at slower rate than in previous years, which in turn would allow for sustained corporate profit growth. These factors combined with attractive market valuations, given the selloff in the fourth quarter, and benign interest rate expectations in the major economies fostered the potential for positive investor returns over the mid-term.

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